Why Urban Outfitters Shares Strutted Down the Runway

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Urban Outfitters , an apparel and accessories retailer catering to teens and young adults, rose as much as 11% after reporting better-than-expected second-quarter results.

So what: For the quarter, Urban Outfitters delivered a 12% increase in sales to $758.5 million, which was driven primarily by organic growth. Cumulative comparable-store sales rose 9%, with its flagship Urban Outfitters stores seeing a 5% boost and Free People adding 38% in a year-over-year comparison. Net income also jumped 25%, with the company reporting EPS of $0.51. Comparatively, Wall Street had expected just $0.48 in EPS. On the heels of its earnings beat, Wedbush upgraded Urban Outfitters to "outperform" from "neutral" and placed a $52 price target on the company -- roughly 30% higher than yesterday's closing price.

Now what: Urban Outfitters has been outpacing analysts' estimates for years, so this is really nothing new. Many investors had expected a downbeat quarter given the struggles at other teen retailers like American Eagle Outfitters and Abercrombie & Fitch, but Urban Outfitters continues to show investors that managing its inventory prudently and discounting sparingly is the key to success in the retail world. While today is certainly a victory for shareholders, I don't consider the company much of a bargain anymore at 20 times forward earnings, and would suggest waiting for a sizable pullback.

If Urban Outfitters' results prove anything, it's that the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.